1. PRODUCTIVITY

2. The Economic System Transforms Inputs to Outputs
The economic system transforms inputs to outputs at about an annual 2.5% increase in productivity (capital 38% of 2.5%), labor (10% of 2.5%), management (52% of 2.5%)
Land, Labor, Capital, Management
Goods and Services
Feedback loop
Inputs
Process
Outputs

3. Measures of Competitiveness
Productivity
GDP (Gross domestic product) growth
Market capitalization
Technological infrastructure
Quality of education
Efficiency of government

4. What is Productivity?
Productivity is a common measure of how well resources are being used or a measure of the effective use of resources usually expressed as the ratio of output to input
Productivity =
Output
Input

5. Productivity measures are useful for
Tracking an operating unit’s performance over time
Judging the performance of an entire industry or country

6. Why Productivity Matters
High productivity is linked to higher standards of living
As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living
Higher productivity relative to the competition leads to competitive advantage in the marketplace
Pricing and profit effects
For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry

7. Typical Impacts of Productivity Improvement
As productivity improved Costs were decreased Wages increased
Parts per man hour 95
100
105
110
115
Year A
Year B
Year C
Cost per unit decreased
$1.50
$1.75
$2.00
$2.25
Year A
Year B
Year C
Average worker's annual cash compensation increased
24000
25000
26000
27000
Year A
Year B
Year C

8. Measures of Productivity
Partial Output Output Output Output measures Labor Machine Capital Energy
Multifactor Output Output
measures Labor + Machine Labor + Capital + Energy
Total Goods or Services Produced
measure All inputs used to produce them

9. Examples of Partial Productivity Measures
Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour
Energy Productivity
Units of output per dollar input
Dollar value of output per dollar input
Capital Productivity
Units of output per machine hour
Value-added per machine hour
Machine Productivity
Units of output per labor hour
Units of output per shift
Value-added per labor hour
Labor Productivity

10. Typical Measures of Productivity in Different Organizations
Restaurant
Customers (meals) per labor hour
Retail store
Sales per square foot
Chicken farm
Lbs of meat per lb. of feed
Utility plant
Kilowatts per ton of coal
Paper mill
Tons of paper per cord of wood

11. Example 1 7040 Units Produced Sold for $1.10/unit Which productivity
Cost of labor : $1,000
Cost of materials: $520
Cost of overhead: $2000
Which productivity
measures can be
calculated?
What is the
multifactor productivity?

12. Solution 1 MFP = Output Labor + Materials + Overhead
MFP = (7040 units)*($1.10)
$ $520 + $2000
MFP = 2.20

13. Example 2 5,500 Units Produced Sold for $35/unit
500 labor hours are used
Cost of labor: $25/hr
Cost of raw material: $5,000
Cost of overhead: 2 x labor cost
What is the labor productivity?
What is the multifactor productivity?

14. Solution 2: Labor Productivity
5,500 units/500 hours = 11 units/hour
Or we can arrive at a unitless figure:
(5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

15. Solution 2: Multifactor Productivity
MFP = Output
Labor + Materials + Overhead
MFP = (5,500 units)*($35)
(500hrs.)*$25/hr. + ($5000) + 2*(500hrs.)*$25/hr.
MFP = 4.52

16. Example 3
You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms.
Which productivity measure should be used?
Answer: Could be classified as a Partial Measure.
Is productivity increasing or decreasing?
Answer: Last week’s productivity = 480/2000 = 0.24, and this week’s productivity is = 560/2400 = So, productivity has decreased slightly.

17. U.S. Multifactor Productivity

18. Productivity Growth
Productivity Growth is a key factor in a contry’s rate of inflation and the standard of living of its people

19. Example 4
Labor productivity on the ABC assembly line was 25 units per hour in In 2007, labor productivity was 23 units per hour. What was the productivity growth from 2006 to 2007?

20. MFP Growth - Non-Farm

21. MFP Growth - Manufacturing

22. Measurement Problems
Quality differences may distort productivity measurements
External elements may cause an increase or decrease in productivity
Precise units of measure may be lacking
Technological differences may lead to misleading results.

23. Productivity improves when firms:
Become more efficient
Downsize
Expand
Retrench
Achieve breakthroughs

24. Factors Affecting Productivity (1 of 3)
Standardization
Technology
Use of Internet, fax machines, , computerized billing, software
Searching for lost or misplaced items
Scrap rates
Labor turnover, layoffs, new workers
Safety
Bottlenecks

25. Factors Affecting Productivity (2 of 3)
Methods
Design of the workspace
Incentive plans that reward productivity
Capacity utilization
Location
Layout
Inventory
Scheduling
Methods
Quality
Technology
Management

26. Factors Affecting Productivity (3 of 3)
Shortage of IT workers and other technical workers
Equipment breakdowns
Part and material shortages
Inadequate investment in training & education of the employees

27. Key Steps for Improving Productivity
Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods for productivity improvements
Establish reasonable goals
Get management support (make it clear that management supports and encourages productivity improvements.)
Measure and publicize improvements
Invest on labor force by training and education
(Don’t confuse productivity with efficiency)

28. Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation
10/hr
30/hr
Machine #2

29. Service Productivity Typically labor-intensive as in teaching
Frequently individually processed (doctors)
Often an intellectual task is performed by professionals (medical diagnosis)
Often difficult to mechanize or automate (haircut)

30. Service Sector Productivity
Service sector productivity is difficult to measure and manage because
It involves intellectual activities
It has a high degree of variability
A useful measure related to productivity is process yield

31. Productivity in the ‘90s – 7 – 6 – 5 – 4 – 3 – 2 – 1 – 0 – -1 – -2 –
| | | | | | | | | | | |
‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘ –
7 –
6 –
5 –
4 –
3 –
2 –
1 –
0 –
-1 –
-2 –
-3 – US
Germany
Japan